Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange

Keith Ericson and Amanda Starc

No 18089, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze consumer demand and model the effect of pricing regulation under imperfect competition using data from the Massachusetts health insurance exchange. We identify consumer demand using coarse insurer pricing strategies. There is substantial heterogeneity in preferences by consumer type, with younger consumers twice as price sensitive as older consumers. As a result, older consumers face higher markups over costs. Modified community rating links prices for consumers that differ in both costs and preferences. Constrained prices are not simply the population-weighted average of unconstrained prices, because community rating changes the marginal consumer firms face. Tightening rating regulations transfers resources from low cost to high cost consumers, but also reduces firm profits and increases overall consumer surplus. We use our model to examine other insurance regulations. For instance, minimum loss ratios (designed to limit firm profits) will also alter the transfers between consumers. Moreover, risk adjustment will be insufficient to equalize prices across consumer types, as markups still differ. As a result, without a mandate, the market can unravel due to differences in preferences alone

JEL-codes: I11 I13 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-hea, nep-ias and nep-mkt
Note: EH
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Published as Keith M. Marzilli Ericson & Amanda Starc, 2015. "Pricing Regulation and Imperfect Competition on the Massachusetts Health Insurance Exchange," The Review of Economics and Statistics, MIT Press, vol. 97(3), pages 667-682, July.

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